Platforms & Empires | Deep Tech & The Industrial Internet | Circular Economy Grants & Funding | Fintech Accelerators | Late Payments & Fintech | Crowdfunding Grows | University Spinouts Declining | RCBs: Random Chinese Bidders | Food Industry Staff Shortages | Digitising Tax Returns
Digest of news and trends in the GRID marketplace in February 2017:
PLATFORMS & EMPIRES
Tandem Bank chief executive Ricky Knox talks sarongs, dumb pipes, ornithology and why Facebook is scared of banking | Harriet Green, City A.M. February 27
Ricky Knox, co-founder and new chief executive TANDEM BANK: the future lies in platforms. “Those of us building the empires will be the ones who create platforms and allow others’ products on.”
He starts sketching a diagram – a digital bank, a P2P firm that gets a banking licence, a financial comparison website, a fintech company yet to be created... all platforms that will compete to offer people access to numerous services via one touch point.
DEEP TECH & THE INDUSTRIAL INTERNET
Less miserable. The rise of “deep-tech” is boosting Paris’s startup scene | The Economist. February 23rd
Europe will never create a hub of tech firms and investors to rival Silicon Valley, many experts on entrepreneurship concur. Its markets are still fragmented along national lines, flows of capital into the region are limited and because of lingering, conservative attitudes to risk, few startups grow to rival American champions. But some digital life does flourish, spread among cities rather than fixing in one spot:
• Fintech firms cluster in London.
• Gamers and music-sharing sites do well in the Nordic countries.
• Berlin has a crop of companies that go beyond the kind of me-too consumer sites incubated by Rocket Internet, a notorious startup factory: new companies with expertise in the “internet of things”, for example.
• Milan, with strong medical universities, has flourishing biotech startups.
• The most striking case of fresh growth is in Paris. Nicolas Brusson, a co-founder of BLABLACAR, says he has witnessed an upsurge in entrepreneurial ambition in France. A venture-capital investor says there has been a “huge shift in mindset” among founders of firms: they are now expert not only as inventors but as designers of business plans.
Venture capital is beginning to gush. Last year France saw 590 rounds of capital raising, more than any country in Europe, according to Dealroom, which watches tech-industry trends. Although slightly more capital went to startups in Britain (€3.2bn) than in France (€2.7bn), the rate of increase in France was dramatic.
One reason for the French gains is that earlier investments in infrastructure for startups are starting to pay off. Established business figures, such as Oussama Ammar and Xavier Niel, have set up training facilities and incubator firms that are now producing entrepreneurs. Niel:
• ILIAD, France’s fourth-largest mobile operator, which owns the brand Free;
• 42, a computer-programming school with a capacity of 2,500 students that charges no tuition fees;
• STATION F, in central Paris, the world’s largest incubator which will have over 3,000 workstations.
The main factor behind all the new activity is a change in graduates’ aspirations. Graduates are particularly keen on startups in the so-called “deep tech” sector—involving, among other things, artificial intelligence (AI), machine learning and big data. Philippe Botteri of ACCEL, a venture-capital fund, who oversees investments in Europe, says 80% of his firm’s activity these days is in deep tech, an area in which Europeans, often in possession of specialised and further degrees in engineering and maths, have advantages. France has emerged fastest in the last few years as a top destination for capital, he says, largely because its graduates have particular strength in these fields.
Julien Lemoine, for example, co-founded ALGOLIA, a startup with funds from Accel that provides customised search services using AI. From an office with glass walls in central Paris (and from a sister office that opened in San Francisco in 2015) his firm serves 2,300 paying clients globally—two-thirds of revenues come from America. Algolia will employ 200 people by the end of the year, up from 60-plus now. His staff only speak English.
It is a similar story at SHIFT TECHNOLOGY, a Paris-based firm founded by three maths graduates. It uses AI to detect fraudulent insurance claims on behalf of big insurers. Jeremy Jawish, one of the firm’s co-founders, says Paris is a suitable space to grow simply because it is “the next AI centre”. Cisco and Facebook have both set up AI operations in Paris to attract local talent.
Europe has a chance to dominate deep tech | John Thornhill, FT. February 6
ATOMICO, the venture capital fund, …in November argued that Europe had acquired real traction in what it termed “deep tech”: artificial intelligence, robotics, virtual and augmented reality and the internet of things. “The future is being invented in Europe,” the report proclaimed.
All this happy Euro-tech talk requires something of a reality check. In those rare instances when promising European tech companies do achieve significant scale, they tend to be snapped up by US and Asian rivals. Qualcomm of the US is paying $47bn for NXP, the Netherlands-based chipmaker, Japan’s SoftBank has acquired ARM HOLDINGS for £24.3bn and Google bought Britain’s leading AI company, DEEP MIND, for a reported £400m in 2014. The market value of the entire European tech sector amounts to just 7 per cent of that of the US.
Google, Apple, Facebook and Amazon — or les Gafas as they are known in France… If ever the leaders of Silicon Valley lie awake at night fretting about the future, they are far more likely to worry about the astonishing internet giants of China, such as Alibaba, Tencent and Baidu, than they are about any emerging rivals from Europe.
Yet there are two reasons why Atomico is right to suggest things may pan out differently in Europe this time.
1. The first is that we are now moving from the era of the consumer internet to the industrial internet, which is reshaping the manufacturing sector, playing more to Europe’s strengths. It would be senseless for Europe to try to replicate Silicon Valley. But given its strong industrial base, Europe can still create something unique. Europe undoubtedly has the technological, financial and human assets to flourish in the digital economy:
• Europe boasts five of the world’s top 10 computer science institutions.
• There are some 4.7m professional developers in Europe compared with 4.1m in the US.
• Europe’s financing market has also grown bigger and deeper. Although the market has cooled since the Brexit vote, about $13bn was invested in European tech start-ups in 2016 compared with $2.8bn in 2011.
• There also appears to be an urgent recognition by many of Europe’s established companies that they need to surf the digital wave if they are not to be crushed by it. Two-thirds of Europe’s biggest companies have directly invested in a tech company as the old and new economies merge. One-third have acquired one since 2015.
2. The second reason for relative optimism is cultural. Frédéric Mazzella, the founder of BLABLACAR, the French ride-sharing company that now operates in 22 countries, points to a profound shift in attitudes among Europe’s young. They no longer expect all the answers to come from the state or big organisations and are determined to shape their own future.
CIRCULAR ECONOMY GRANTS & FUNDING
Wake up and smell the rewards from recycling | Laura Onita, The Sunday Times. February 19
Arthur Kay, founder of BIO-BEAN in Cambridgeshire – which works with waste management companies to collect coffee grounds from hundreds of shops and dries to make logs to burn on barbecues and wood stoves - is part of a growing cluster of entrepreneurs operating in the so-called circular economy. Champions of the movement turn waste into new products or design materials that can be reused again and again — straightforward recycling is not enough. The circular economy is a term now being applied to a multitude of situations:
• Car maker RENAULT’s process to repurpose old car parts, which the company has done since 1949, is now considered a “circular” business model.
• Flat-letting website AIRBNB, which offers holiday accommodation without the need to build new hotels, is fighting to be included.
• Clothing brand LEVI STRAUSS, whose stores accept old clothes and shoes to turn into insulation for buildings, is part of it, too.
Research by the Ellen MacArthur Foundation, a charity that promotes the circular economy, estimated that £271bn of government grants and venture capital backing is available across Europe for companies such as Bio-bean. Early stage companies can get advice and grants from a number of local bodies. In the capital, ADVANCE LONDON, a three-year programme launched last month, helps companies to adopt or transition to circular business models.
The sector has won favour with the Scottish government. Iain Gulland oversees Scotland’s £18m CIRCULAR ECONOMY INVESTMENT FUND …launched last April, aiming to invest it over the next two years.
Gordon Reid, from Lockerbie, Dumfriesshire, turned to crowdfunding to grow MACREBUR, which adds plastic waste to make road surfaces last longer. “It allows us to maintain the management and shareholding without too much interference,” said Reid, who set up MacRebur last year with two friends. MacRebur is already turning a profit on sales of £137,000. It buys waste from recycling companies and has laid down its “plastic roads” around Carlisle. “There is a huge green benefit,” Reid said. He is raising £590,000 for a 7.7% stake on SEEDRS, the equity crowdfunding platform, to expand abroad. “We’ve had interest from all over the world,” he said.
Food and drinks start-ups are also going circular. TOAST ALE, a brewer that uses discarded bread crusts and unsold loaves as its main ingredient, is considering a crowdfunding campaign to develop new products. Toast was set up by author and campaigner Tristram Stuart a year ago to tackle food waste in Britain, a problem that weighs in at 15m tons, much of it bread. He hopes his ale will help offset the 900,000 tons of bread thrown away every year. So far, it has sold 16,000 bottles and has posted revenues of £100,000. Profits go to Feedback, Stuart’s charity that campaigns to end food waste, and it has franchised the concept in Iceland. Toast collects its bread from bakeries and sandwich makers, many of which would usually have to pay for waste removal. “It’s cheaper for them to give us the bread than it is to dispose of it,” Toast’s managing director Robert Wilson.
Start-up accelerator provides spark for 3,000 jobs | Andrew Lynch, The Sunday Times. February 19
Founders under the wing of , the world’s largest free accelerator for small businesses …has helped to create 3,152 jobs since its launch in 2012. The accelerator puts small businesses through their paces at a dozen hubs around the country, from Belfast to Brighton.
This year it will set up a fintech accelerator at its home in Royal Bank of Scotland’s Gogarburn headquarters near Edinburgh. It will also open in London for the first time at RBS’s digital hub at the Angel in August. This will be Entrepreneurial Spark’s biggest hub yet with 100 seats.
“We are looking to take in a number of businesses with a fintech focus and give them specialist support from RBS, [accountants] KPMG and [computer company] Dell,” said Lucy-Rose Walker, Entrepreneurial Spark’s chief executive and co-founder. “It will give them an opportunity to ‘beta test’ their products within a financial services organisation — giving them access to something they normally wouldn’t get.”
LATE PAYMENTS & FINTECH
It’s time to turn to fintech to solve the late payment problem | Tony Duggan, chief executive of CROSSFLOW PAYMENTS,
City A.M. opinion pages. February 17
… SMEs accounting for a staggering 99 per cent of all businesses in the private sector. While many of these businesses thrive, a significant number suffer as a result of late payment, impacting their ability to invest and ultimately grow.
….with 37 per cent of SMEs citing it as the main contributor towards cash flow problems. Recent research by R3, the Association of British Recovery Professionals, found that over a fifth of corporate insolvencies were because of late payment for goods and services.
… action must be taken to help SME suppliers receive payment on time. Traditional models such as banking and factoring come with endless paperwork for businesses strapped for time and still often result in a 30 day payment period, making it difficult for SMEs to manage their working capital.
Businesses that are able to combine deep credit expertise with technological innovation are challenging the status quo. Allowing SMEs to sign up with no personal guarantees, access outstanding invoices immediately and receive payment within a matter of days, not months.
Large corporates are also starting to recognise the value in using alternative finance platforms, such as Crossflow which allows firms to manage their supply chain more effectively.
What do we want? £26bn . . . When do we want it? Now! | Kiki Loizou, The Sunday Time.s February 12
Research by payments processor Bacs shows the UK’s job creators are waiting on £26bn of unpaid bills. A report by software giant Sage suggested that 50,000 business failures could be avoided if firms paid suppliers on time or in a reasonable period.
Joanna Jensen runs CHILDS FARM, selling toiletries for babies and children with sensitive skin. The company, based near Basingstoke in Hampshire, has so far struck deals with nine stockists, gained customers in Iceland and Cyprus, and grown to employ 12 staff. Jensen uses MARKETINVOICE, which helps firms borrow against their unpaid invoices and grants cash in 24 hours.
“If you’re a big, established business, waiting 90 days from the end of the month to be paid might be fine but for a smaller company it’s not. As a small business, you are busting to make sure your bills are paid on time,” said Jensen, 46. She said customers such as Waitrose and Boots always pay promptly but because of the terms of payment she still needs help with cashflow.
This situation is made more painful by the so-called settlement discounts Jensen and other suppliers may have to contend with. Some big companies charge suppliers up to 3% of what they are owed just for getting paid. In 2008, Boots was criticised for charging suppliers 2.5% of invoice value in return for settling a bill.
Unlike some European countries, Britain has not enforced laws on payment terms. The business department said this is because respondents to a consultation did not want maximum payment terms made legal. Rather, those who were surveyed wanted more transparency. As a result, large companies will have to report on their payment practices and the average time it takes to pay suppliers. As of April, failure to file this information twice a year will be a criminal offence.
The government is advertising to hire a small business commissioner to resolve disputes between firms and their wealthier clients. The commissioner will also have the right to publicly name larger businesses that pay unfairly.
The FEDERATION OF SMALL BUSINESSES (FSB) has called for the prompt payment code of 2008 to be given more teeth. As it stands, almost 2,000 voluntary signatories agree to pay suppliers within 60 days, but there is no shaming of those who do not sign up, or fall off the register.
In Leyton, east London, Krista Brown has seen her share of unfair terms and has had to pull away from some customers as a result. “We did work for one business last August and were not paid until December,” said Brown, 45, who runs PERSONA, providing event security. She has eight staff and 300 guards on her books. “We can’t afford to battle it out in court with big companies.” “I’ve been without a salary many times because I’ve had to pay bills. I know so many other business owners that also struggle. There should be harsher legal implications.”
The little-known Late Payment of Commercial Debts (Interest) Act 1998 lets companies claim interest of 8% above Bank rate for any late payment over a six-year period but does not stop firms setting lengthy terms — and it can cause friction.
UK start-ups struggle to raise money as private equity deals fall |Andy Bounds FT. February 14
Fast-growing UK companies are finding it harder to raise money, with the number of private equity deals falling for the first time in at least five years. The number of equity investments in 2016 fell by 18 per cent from the previous year, according to research house, Beauhurst.
One bright spot was the growth of crowdfunding platforms, which are moving from early seed capital to regularly raising £1m plus. Despite an overall decline in crowdfunding deals, later-stage deals increased by 10 per cent. Pedro Madeira, Beauhurst’s head of research, said that “crowdfunding platforms are moving up the value chain and (in some cases) becoming proto-fund managers.”
MACREBUR, a Scottish start-up, turned down approaches by venture capitalists in favour of crowdfunding. The company mixes asphalt with waste plastic to create a more environmentally friendly and cheaper road surface. It is raising £590,000 by selling a 7.7 per cent stake on SEEDRS, a crowdfunding platform. MacRebur, in Dumfriesshire, is already profitable on £160,000 turnover. Its “plastic road”, which replaces 15 per cent of the bitumen in tarmac with polymer beads, is laid down on roads around Carlisle and forms its airport runway. Toby McCartney, one of three founders, said crowdfunding offered more possibilities than private equity. “The company wants to expand on the continent before Brexit and says it has a worldwide potential market of £6.4bn annually.
Seedrs raised £85m in 159 deals last year, almost as much as in the previous three years. It included its biggest campaign, £4.35m for PERKBOX, an employee and customer engagement provider.
CROWDCUBE, a competitor, raised more than £80m in equity and bonds for companies. The average funding round increased to £642,000 from £550,000. Daniel Lyons, technology director at adviser EY, said “…crowdfunding is still seeing growth as the level of due diligence and scrutiny is often lower.”
UNIVERSITY SPINOUTS DECLINING
How to make our spinouts graduate into new Googles | Kiki Loizou, The Sunday Times. February 5
…..as Britain looks to improve its rate of converting success in the lab to profits in the marketplace, deals such as these (PURELIFI and EDINBURGH UNIVERSITY) between professors and universities are coming under greater scrutiny.
Britain has three of the world’s top 10 universities, according to the Times Higher Education rankings, but they fall far behind American counterparts in creating companies. Entrepreneurs complain that universities demand too much of a stake. Industry experts and investors claim that promising ideas born at British universities are not spreading their wings fast enough and good technology is being shelved.
The number of companies being created in Britain’s universities is declining, in fact. SPINOUTS UK, which gathers data on the UK sector, says just 38 were created last year, down from 42 in 2015.
… Tony Raven, chief executive at CAMBRIDGE ENTERPRISE, which invests in Cambridge University’s spinout companies. Cambridge asks for roughly 30% of a spinout company, much less than the likes of Oxford, which can take 50%. America’s Massachusetts Institute of Technology (MIT) and Stanford typically take 5%-10%.
In London, Mark Hammond, 33 …at DEEP SCIENCE VENTURES, he brings together scientists and researchers and lets them hone ideas without demanding intellectual property rights or a hefty equity stake. …. “venture builder”, which houses a team of 30 at any one time and takes 15% of a start-up in return for a £50,000 investment.
One big problem is a funding gap that forces many spinouts to nosedive — universities receive more than £1.5bn for research from the HIGHER EDUCATION FUNDING COUNCIL but it does not go far enough, he said. “There is research council money to do the science at the beginning and there are pots to do the initial bit of technology transfer but it still tends to come out too science-focused and not market-focused enough. “Then there is a big gap between getting data on a market, which nobody wants to fund, and venture capitalists who want that evidence.”
Kevin Johnson, partner at MEDICXI VENTURES, a venture capital firm focusing on life sciences, has invested in many spinouts but has seen many good ideas struggle to leave a university lab: “The vast majority of projects don’t get financed…”
RCBs: RANDOM CHINESE BIDDERS
The baby-faced Chinese tycoon who promised billions | Oliver Shah, The Sunday Time. February 5
The unravelling of SINOFORTONE’s story is important because countless British companies now find themselves on the receiving end of takeover interest from Chinese individuals or companies that appear out of the blue, often purporting to have state backing. The phenomenon of the random Chinese bidder, or “RCBs” as they are known in the City, presents challenges for British companies given the difficulty of penetrating opaque Chinese corporate and governmental structures.
Sir Richard Heygate, a former partner at management consultancy McKinsey …was briefly a SinoFortone director …said he met (founder) Peter Zhang in late 2014 at a gathering of the 88 INITIATIVE, a network he set up with City veteran Sir Paul Judge — whose wife Barbara chairs the Institute of Directors — to connect Chinese investors with British entrepreneurs. The network was named after the venue they used, Judge’s flat in a residential tower overlooking the Thames in Pimlico.
“SinoFortone is like a deal brokerage company,” Heygate said. “It doesn’t have any assets itself but it can look for money from various sources.” The only remaining director of SinoFortone Group is 31-year-old Xinyu Tang, who is believed to be Zhang’s girlfriend.
FOOD INDUSTRY STAFF SHORTAGES
UK food industry fears Brexit exodus of EU workers | Helen Warrell and Sarah O’Connor, FT. February 3
From rural fields and farms to the finest restaurants in London’s West End, the UK food industry is scrambling for staff as the supply of EU workers begins to dwindle.
James Hook, the owner of PD HOOK chicken hatcheries in Oxfordshire, said the problem began last summer, but intensified in the new year as EU nationals who went home for Christmas never returned. He employs 2,000 staff in over 100 farms, with as much as 80 per cent of his workers in some parts of the business coming from eastern Europe. As a result of the shortage, he has shut down one farm and is considering whether to close a further two.
Farms and food producers are having to compete harder for a shrinking pool of workers. One poultry farmer said he had raised wages by 15 per cent. Pete Taylor, operations director at recruitment firm ENCORE PERSONNEL, which supplies labour to the food industry, is laying on minibuses to bring in staff to pick and process food in Spalding, Lincolnshire, from the wider surrounding area.
Economists have long argued that the UK can reduce its reliance on low-skilled migrants by allowing swaths of agriculture to die out and importing produce instead. But the recent shortages of courgettes, spinach, lettuces and other vegetables in British supermarkets as a result of extreme weather in Spain highlights how vulnerable the UK supply chain already is.
While the staff shortages are most acute among vegetable-pickers and poultry farmers at the start of the food chain, there are also fears that the reluctance of skilled EU chefs, sommeliers and waiters to relocate to Britain will damage the top end.
“This is a particular hotspot on the south coast in terms of demand for labour,” said Julian Marks, managing director of BARFOOTS OF BOTLEY, an agricultural supplier in nearby Pagham. Barfoots has a pool of about 1,000 workers at present, rising to 1,600 or so in peak harvesting times. The great challenge, according to Mr Marks, is managing a constant churn of workers constantly bolting for better opportunities or because of family issues.
Nick Houghton, managing director of a food manufacturing company in Nottingham, relies on EU staff to fill 75 per cent of his workforce and complains that the atmosphere has become increasingly hostile.
DIGITISING TAX RETURNS
Businesses face £280 cost for HMRC digital drive | Vanessa Houlder, FT. February 2
…government’s ambitious plans to digitise the tax system. HM Revenue & Customs … new rules forcing businesses to keep digital records and send quarterly updates to the tax authority using computers or smartphones are due to come into force in April 2018. … extra initial costs faced by businesses, which might include software and accountancy costs
A survey conducted by the CHARTERED INSTITUTE OF TAXATION (CIOT) suggested that many small businesses would need to engage their tax advisers four or five times a year.
HMRC has left open the possibility of deferring the changes for some small businesses and there is a chance that more small businesses and the self-employed could be exempted by raising the £10,000 turnover exemption threshold. …also:
• announced an exemption for charities, a deferral for large partnerships and a 12-month grace period before penalties for late submissions would be imposed.
• agreeing that spreadsheets could be used to record business information. Experts warned, however, that users might be forced to switch to different types of spreadsheets to link with HMRC’s approved quarterly reporting software.
• announced plans to simplify the tax system for unincorporated business with turnover below £150,000. This would allow an extra 2.5m self-employed businesses and landlords to calculate their tax liabilities using a “cash in, cash out” basis.